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Germany and Indonesia | An analysis on the relationship between economic giants

German investment in the ten member states of the Association of Southeast Asian Nations (ASEAN) has been increasing steadily and has the potential to grow further in the coming years. Let’s have a look at the Germany and Indonesia relationship.

Indonesia

Indonesia represents the largest ASEAN country with a vast potential to accelerate into one of the major economies of the world.

Ranked 30 on the Market Potential Index, Indonesia represents a large consumer market with a potential for increasing attractiveness for German products. FDI inflow in Indonesia somewhat dropped in 2016 due to both domestic and international factors. 2017 showed slight recovery with some US$268 million invested in Indonesia by German investors.

German – Indonesian Relations at a Glance

Having exported US$3 billion worth of goods to Indonesia in 2017, the country represents the 52nd largest export partner of Germany. In the same year, Germany imported US$4.4 billion worth of goods from Indonesia. Germany mainly imports textiles and shoes, oil-based products, electronics and food products. Import-Export trade registered a modest 15 percent growth in 2017.

Several major German brands have already established offices or production facilities in Indonesia. Adidas, Airbus, BASF, Bayer, BMW, Daimler, Bosch, Siemens and ThyssenKrupp are among the major German brands with a presence in Indonesia. Several others have recently established offices or facilities or are on the verge of doing so. In particular, German companies are attracted to Special Economic Zones in Indonesia, which offer the perfect infrastructure for foreign business to set up in the country.

Germany and Indonesia neck to neck as the top largest economies in the world | PwC

Investment Outlook

Indonesia’s fast-growing middle class represents a vast consumer market for German products. Increasing disposable incomes make German products more affordable in recent years. At present, food items still represent the most significant consumer good segment for German exporters. With a stable annual growth rate of around 5 percent, Indonesia presents perfect opportunities for German exporters.

With its large and cheap workforce, the country is also an ideal location for setting up of manufacturing facilities by German companies. Local resources make the production less dependable on global developments. A growing domestic market and a strategic position in Asia provides additional advantages.

With an increase in their standard of living, Indonesians are also spending more on healthcare. Germany was the largest exporter of medical equipment to Indonesia in 2017 with a total export of US$138 million. Notably, German high-tech are in high demand and open up vast opportunities for German high-tech producers in one of the largest and fastest growing healthcare markets in Asia.

The automotive sector with an annual growth of over 5 percent also offers immense opportunities. Although the market is primarily dominated by Japanese producers that sell small, eco-friendly and therefore less-taxed cars, increasing disposable incomes open up opportunities for German automotive companies.

The construction sector also offers opportunities for German companies. With an annual growth rate of more than 10 percent in the last ten years, it represents a significant market for future German investments. In 2017, the market grew 24 percent due to significant investments, especially in the tourism industry. The country’s infrastructure depends heavily on foreign machines and finances to back this development trend.

The energy sector, which is built upon foreign investments and equipment as the local industry is not in the position to conclude complex energy projects, is another potential area for increased German investments.

Most machines in Indonesia are imported. The recent ban on export of untreated resources opens the opportunities for large heavy-industry projects which will be extensively dependent on foreign know-how, including German technology.

Risk analysis

Indonesia represents a country with tremendous potential but also poses risks. Non-tariff barriers continue to hinder investments and trade. Rules around import requirements are subject to regular changes. Corruption also poses risks in the country. In the 2015 Corruption Perception Index, Indonesia was placed 88 out of 168 countries. The relatively unskilled workforce presents another obstacle for investments in Indonesia.